More googling revealed that the VM needed Vista as the chosen OS on install to set the correct sound driver. I knew this and had definitely set it up that way, but possibly SP1 reverted that change. Anyway, to remake the VM:
1. Run the wizard to create a new VM from inside Virtual PC 2007 SP1
2. Select "create a new virtual machine"
3. Name it as a new name (or v2 on the old name)
4. Select "Vista" as the operating system
5. Select "use an existing virtual hard disk" and point it to the VHD file of the old VM
That done, I fired it up and it picked up the sound card, but couldn't install drivers for it. Seeing that the virtual hardware is the most generic available it must be something to do with how it is being displayed to the operating system. More googling showed that you may need to reinstall the virtual machine additions:
1. Uninstall virtual machine additions
2. ignore any errors coming up about services being in use, they get cleaned up on the restart.
4. Install virtual machine additions again.
A couple more updates and I'll store this VM as a blank to base future W7 VMs off.